Brazil’s Central Bank: High Dollar, hot economy drive inflation rise
The increase in the dollar, rising commodity prices (primary goods with international pricing), and a heated economy largely explain the rise in inflation in Brazil in 2024. On Friday (Jan. 10), the Central Bank released a letter explaining why the Broad National Consumer Price Index (IPCA) exceeded the target ceiling last year, reaching 4.83 percent.
For 2024, the National Monetary Council (CMN) set the inflation target at 3 percent, with a tolerance range of 1.5 percentage points in either direction. This meant inflation could have reached up to 4.5 percent without requiring the Central Bank to submit an explanatory letter to the president of the CMN, which oversees the inflation targeting system.
According to the document, the primary factors behind the 1.83 percentage point deviation from the 3 percent inflation target were imported inflation (0.72 p.p.), carryover effects from the previous year (0.52 p.p.), the output gap—when the economy operates above its capacity (0.49 p.p.)—and inflation expectations (0.3 p.p.).
Within the imported inflation category, the main driver was the rise in the dollar, followed by higher commodity prices. The Central Bank noted that commodities did not contribute more significantly to the target overshoot primarily because international oil prices fell by 5.4 percent last year, which reduced the deviation from the target center by 0.59 percentage points.
Exchange rate depreciation
Regarding the dollar, the Central Bank's letter attributed most of the exchange rate depreciation to domestic factors. The document highlights that the Brazilian real depreciated more significantly (19.7%) in 2024 than the major currencies of other emerging markets. During the same period, the Turkish lira fell by 16.8 percent, the Mexican peso by 15.3 percent, the Chilean peso by 10.9 percent, and the Colombian peso by 10 percent.
“Domestically, economic agents’ perceptions of the fiscal scenario have significantly influenced asset prices and expectations, particularly the risk premium, inflation forecasts, and the exchange rate,” the Central Bank stated in its letter.
Domestic market
Although external factors were predominant, the Central Bank noted that “strong economic activity, which exceeded expectations throughout the year, also contributed to inflation surpassing the tolerance range.” Gross Domestic Product (GDP) grew by 3.3 percent in the year up to the third quarter of 2024, and the bank forecasts 3.5 percent growth for the full year.
According to the bank, the historically low unemployment rate has also contributed to inflationary pressure. In November, the unemployment rate, as measured by the Brazilian government´s statistics agency IBGE, reached 6.5 percent, the lowest level on record.
